A doubtful warrant

So far, only one bank Old National Bancorp has bought back warrants issued to the Treasury to give taxpayers the chance of some bailout upside. Even on kind assumptions, the bank looks to have gotten the best of the deal. Use our new calculator to evaluate other cases.

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In the original Troubled Asset Relief Programme under Hank Paulson, the former US Treasury secretary, banks that took Tarp money for preferred stock also had to give the Treasury warrants over shares worth 15% as much as the stock investment.

In a February report for the Congressional Oversight Panel, Duff & Phelps concluded that on average across banks and a range of valuations, the warrants were worth some 25% of the face value of the underlying stock at the time of the government investments after taking into account the structural features and illiquidity of the warrants. The firm further concluded that Tarp preferred stock was underpriced so that the market value of the preferred stock and the warrants combined was, at the time, less than the Treasury invested.

The biggest recipients in the original Tarp programme were Citigroup, JPMorgan and Wells Fargo which each took investments of $25bn and issued accompanying warrants over $3.75bn of stock and Bank of America, which took $15bn initially. The four banks' share prices are down by roughly 80%, 10%, 20% and 60% respectively since the government's investments. Shares in Goldman Sachs and Morgan Stanley, which took $10bn each, are both up about 20%.